Bài tập 2. Báo cáo tư vấn kinh tế vĩ mô (2014)

Discussions focused on the near-term macroeconomic stance to entrench stability; measures to underpin a growth-friendly fiscal consolidation and address rising public debt; strengthenin[r]

VIETNAM

2014 ARTICLE IV CONSULTATION—STAFF REPORT;

PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR VIETNAM

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year In the context of the 2014 Article IV consultation with Vietnam, the following documents have been released and are included in this package:

 The Staff Report prepared by a staff team of the IMF for the Executive Board’s

consideration on a lapse of time basis, following discussions that ended on June 11, 2014, with the officials of Vietnam on economic developments and policies Based on

information available at the time of these discussions, the staff report was completed on July 15, 2014

 A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank

 An Informational Annex prepared by the IMF

 A Press Release summarizing the staff report

 A Statement by the Executive Director for Vietnam

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information

Copies of this report are available to the public from

International Monetary Fund  Publication Services

PO Box 92780  Washington, D.C 20090 Telephone: (202) 623-7430  Fax: (202) 623-7201 E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C

October 2014

VIETNAM

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION

KEY ISSUES

Context Economic performance has improved over the last year The recovery is taking

hold, although domestic activity remains weak, in part constrained by weak banks and inefficient state-owned enterprises (SOEs) Inflation has declined, the current account remains in large surplus, and international reserves have increased The authorities place

a priority on preserving macroeconomic stability, tackling banking sector vulnerabilities,

and reforming SOEs, though implementation has been gradual in some key areas

Outlook and risks Growth is projected to recover gradually over the coming years, with

the current account returning to a deficit and inflation contained On current policies, public debt is projected to reach 60 percent of GDP Risks include weaker trading partner growth, geopolitical tensions, slow structural reforms, and delayed fiscal consolidation

Early conclusion to key trade negotiations would be growth-positive

Fiscal policy Deficits have been sizable and rising public debt requires attention A

medium-term growth-friendly consolidation is recommended, based on enhancing revenue and rationalizing unproductive expenditures while preserving crucial social and capital spending This would ensure public debt sustainability with space to address contingent liabilities from banking sector and SOE restructuring

Monetary and exchange rate policy The current monetary policy stance is

appropriate Greater exchange rate flexibility would help buffer external shocks, facilitate improved reserve adequacy, and help lay the groundwork for shifting toward using inflation as a nominal anchor over the medium term

Banking sector reform Several policy measures have been taken recently, but the

overall gradual approach will likely continue constraining credit growth and keep the system susceptible to shocks and significant asset deterioration A more expeditious recognition of nonperforming loans, bank restructuring and orderly resolution would support robust credit creation and macro-financial stability

State-owned enterprise reform Progress is being made Implementing restructuring

plans and accelerating equitization would help ensure more efficient resource allocation, strengthen banks, and deliver higher future growth Reform should also focus on

strengthening corporate governance and ensuring a level playing field

July 15, 2014

Ms Nguyen and Mr Ghaffour (OED) joined the concluding meetings

Ms Sirihorachai and Ms Tu assisted in this report’s preparation

B Monetary and Exchange Rate Policy _ 16 

C Banking Sector Reform 19 

D SOE Reform _ 21 

STAFF APPRAISAL 23 

BOXES

1 Poverty Reduction, Inclusive Growth, and Remaining Challenges _4 

2 Productivity, Technical Efficiency, and Potential GDP 8 

3 What is an Appropriate Medium-Term Public Debt Target? _ 14 

4 The Effects of Monetary Policy on Bank Lending 17 

5 External Sector Assessment 18 

6 Bank Reform and Contingency Planning _ 22 

FIGURES

1 The economy is gradually recovering 6 

2 The external position recovered strongly after capital outflows mid-2013 7 

3 Regional Linkages _ 10 

4 The fiscal position has deteriorated, and public debt is rising _ 12 

5 Overall financial conditions have improved, but banks remain weak 20 

surplus and international reserves have increased

Significant gains in poverty reduction made in recent

decades have been preserved (Box 1)

Notwithstanding, growth is below its previous trend,

and the economy is exposed to spillovers from

downside external shocks Domestic vulnerabilities also

exist, including banking sector weakness and

inefficient state-owned enterprises (SOEs), both of

which are restraining activity Public and publicly

guaranteed debt has risen to a level that requires attention

2 The authorities place a high priority on securing macroeconomic stability and

strengthening fundamentals The government’s socio-economic development plan (through 2020)

targets average growth of 6½–7 percent with single-digit inflation It prioritizes macroeconomic stability, tackling banking sector vulnerabilities, and reforming SOEs and public investment

Accelerating and deepening the agenda, creating fiscal space to address potential contingent

liabilities from reforms while safeguarding critical social and investment spending, would mitigate risks and facilitate achievement of the development goals Moving gradually toward using inflation

as a nominal anchor with greater exchange rate flexibility would provide a monetary policy

framework more conducive to maintaining stability and buffering external shocks

3 Policies are broadly in line with past Fund advice, although along a more cautious timeline The authorities have made progress on many priorities outlined in the last Article IV

consultation Banking system reforms have been initiated, including individual bank restructuring plans, and a scheme to transfer nonperforming loans (NPLs) to an asset management company However, full implementation of prudential regulations to bring asset classification and provisioning closer to international standards has been delayed, with concurrent slow progress in NPL resolution and bank recapitalization SOE restructuring has moved forward with plans for equitization,

enhanced transparency, and improvements in the legal framework, although implementation has been slow Fiscal consolidation has not materialized

0 5 10 15 20 25 30 35 40

Lao P.D.R Cambodia Myanmar China Vietnam ASEAN-4

Poverty Headcount

(In percent of population) 1/

Sources: World Bank Development Indicators and Vietnamese authorities.

1/ Headcount at US$1.25 per day, for Vietnam official rate (2012)

Box 1 Vietnam: Poverty Reduction, Inclusive Growth, and Remaining Challenges 1

Vietnam has made remarkable progress improving living

conditions and reducing poverty It employs two

approaches to measure poverty The first uses a “basic

needs” poverty line adjusted for inflation, adopted in the

early 1990s with assistance from the World Bank and

updated in 2010 By this measure, the national poverty

rate declined from 58 percent in 1993 to around

17 percent in 2012 A second approach, initially based on

rice equivalents and revised in 2005 to use basic needs,

but adjusted for inflation only every five years, shows

poverty fell from around 28 percent in the early 1990s to

around 9½ percent by 2012—the official rate

While growth has been pro-poor under both measures,

success has brought some additional challenges Inequality has risen slightly compared to the 1990s, spurred by changing patterns of employment away from agriculture, and from low-skill to higher-skill work The Gini

coefficient was 0.39 in 2012, comparable to that of other middle-income countries in the region The remaining poor depend heavily on subsistence agriculture and live in remote upland rural regions, isolated from main markets Poverty has also taken an increasingly ethnic dimension, as the income gap between ethnic minorities and the Kinh majority has grown Many incomes remain close to the poverty level, and are susceptible to falling back into poverty as a result of macroeconomic shocks The quality of, and access to, public services and social

assistance vary between rich and poor households

Based on these findings and cross-country experience, a number of policies could reinforce poverty reduction and support inclusive growth:

 Ensuring macroeconomic stability and reducing vulnerabilities, and structural reforms to support robust, sustainable growth

 Supporting productivity growth in rural areas through improved connectivity, strengthening skills, improving the investment climate, expanding access

to basic services, better targeting

agricultural and social support, and

fostering the occupational and

geographic mobility of labor

Improving access of the poor to

higher-quality education and health

services, particularly in rural areas

and by minority ethnic groups, would

help address inequality of

opportunities

 As the economy is restructured, social spending and social assistance should be better targeted to take into account regional differences in the cost of living and basic services

 Improving the system for monitoring and publishing data on poverty to deliver reliable and accurate

information to policymakers and the public

1 “Well Begun, Not Yet Done: Vietnam’s Remarkable Progress on Poverty Reduction and the Emerging Challenges,”

World Bank in Vietnam, Hanoi (2012).

Poverty Rate (Percent)

Contribution (Percent)

Poverty Rate (Percent)

Official Poverty Estimates

New Poverty Estimates for 2012 by Urban and Rural Areas

0 10 20 30 40 50 60 70

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Official MOLISA poverty HCR GSO-WB poverty HCR Rebasing

Poverty Reduction

(In percent)

Source: World Bank.

17.2 9.6

MACROECONOMIC DEVELOPMENTS, OUTLOOK, AND RISKS

4 Growth is improving gradually and inflation has declined Real GDP expanded by about

5½ percent in 2013, underpinned by robust exports and FDI Domestic activity remained subdued despite supportive countercyclical policies, reflecting in part headwinds from a weakened banking sector and slow progress in SOE reform A negative output gap is estimated to have emerged

(Box 2), and headline and core inflation have fallen, to 5 and 3½ percent, respectively, in mid-2014 The unemployment rate remains low, but underemployment exists, particularly in rural areas, and economy-wide wage growth was flat

5 Fiscal policy eased The 2013 fiscal deficit is estimated at 5½ percent of GDP (GFS 2001),

compared to 4¼ percent implied by the budget.1 Tax revenues fell short of the plan by about

1½ percentage points of GDP, mainly due to sluggish economic growth, tariff reductions, and new exemptions, while nontax revenues significantly outperformed in part due to increased dividend receipts from SOEs Current spending was close to budget while capital expenditure was higher than planned

6 Monetary conditions remain accommodative With inflation on a downward trajectory

and growth below potential, the State Bank of Vietnam (SBV) reduced policy rates by 50 basis points

in early 2014 Overnight interbank rates have been well below policy rates due to ample liquidity

and the domestic government bond benchmark yield curve has declined Sovereign spreads

narrowed by about 100 basis points early this year, but gave back some of those gains following

regional geopolitical tensions in May The official exchange rate was depreciated by one percent in mid-June

7 The current account remains in significant surplus and international reserves

increased Robust growth in exports, tourism, and private remittances led to a current account

surplus of 5½ percent of GDP in 2013 The financial account saw large net inflows of FDI and loans However, in mid-2013 these were balanced by large capital outflows associated with the unwinding

of gold deposits at commercial banks and following the announcement of U.S Federal Reserve

tapering As a result, the overall balance of payments saw only a small surplus in 2013 With

continued robust exports, gross international reserves rose in early 2014, to above US$36 billion, 2½ months of prospective imports of goods and services

8 Bank credit to the private sector has been sluggish and profitability has weakened

Despite accommodative monetary conditions and strong deposit growth, private sector credit

growth was 2¼ percent (s.a., ytd) in March 2014, reflecting weak demand and ongoing adjustment due to weakened balance sheets The system-wide loan-to-deposit ratio has fallen to below

1 GFS 2001 presentation is different from the authorities’ presentation, mainly reflecting the inclusion of off-budget capital expenditure and the exclusion of principal repayments above the line

-4 -2 0 2 4 6

Expenditure stance Revenue stance Fiscal stance

Revenue and Expenditure Stance

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

1-month interbank rate 7-day repo rate Refinancing rate

Interest Rates 1/

(In percent, end of period)

1/ 1-month interbank rate is from Bloomberg.

Figure 1 The economy is gradually recovering

The economy is gradually improving, led by industrial

activity…

…reflecting healthy exports, while domestic demand remains subdued

Headline and core inflation are on downward trajectories Fiscal policy has been expansionary

Monetary policy remains supportive… … and credit growth has been relatively subdued

Sources: Vietnamese authorities; Bloomberg LP; and IMF staff estimates.

-20 -10 0 10 20 30

Gross capital formation Consumption Exports Imports Errors and omissions GDP growth (right axis)

Contribution to GDP Growth by expenditure (2010 prices)

(In percentage points)

-5 0 5 10 15 20

2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1

Agriculture, forestry, and fisheries Industry Construction Services Total

Contribution to Credit Growth

(In percent)

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Inflation and Output Gap

(Year-on-year percent change)

1 W=2009 Weight

Agriculture exports

Exports

(3mma, year-on-year percent change)

1/ Include electronic goods and PC, electronic wire and cable, and telephone (all kinds and

parts ).

Exports

(3mma, year-on-year percent change)

1/ Include electronic goods and PC, electronic wire and cable, and telephone (all kinds and

parts ).

0 5 10 15 20 25 30 35

40 16000

Gross international reserves (right axis) Bloomberg mid-interbank rate Parallel rate

Lower band Upper band

Figure 2 The external position recovered strongly after capital outflows mid-2013

Exports continue to perform well… …sustaining global market share gains

Export activity is supported by robust FDI, increasingly in

manufacturing… …and wages remain competitive internationally

The balance of payments recovered strongly after capital

outflows associated with mid-2013 tapering expectations… …raising the level of official international reserves

Sources: Vietnamese authorities; Bloomberg LP; IMF, DOTS; IMF, WEO; and IMF staff estimates

Nominal Wages Relative to China, Manufacturing Sector 1/

(In percent)

1/ China and Vietnam as of September 2013, and all others at end-2013

-0.04 -0.02 0 0.02 0.04 0.06 0.08 0.1

Change in Export Market Share From Previous Year

(In percentage points)

Current account balance

Capital and financial account balance

Errors and omissions

Balance of payments

Balance of Payments

(In percent of GDP)

Prel.

Box 2 Vietnam: Productivity, Technical Efficiency, and Potential GDP

Total factor productivity (TFP) calculations using data

from the national accounts show that the contribution of

TFP to growth in Vietnam has declined in the last

decade Capital’s contribution increased, but by less than

TFPs’ decline, and consequently growth slowed

Production function frontier analysis confirms this

finding.1 A production function frontier represents the

optimal output that can be achieved given a set of

inputs The basic stochastic production frontier can be

characterized in the Cobb-Douglas form with a

“composed error term” as follows:

where is real GDP, are capital and labor inputs,

and is a traditional error component The last term

is a technical inefficiency component of the error

term restricted to be non-negative ( 0 Intuitively,

it represents the gap between the frontier, which is the

optimal output, and the actual output achieved, which

is usually below the frontier given productive

inefficiencies in the economy

The stochastic production function is estimated for

Vietnam using maximum likelihood estimation and

data from the Penn World Tables from 1970 to 2013 The estimated inefficiency parameter then provides an index of how close or far the economy is from its most efficient frontier in each time period The inefficiency gap varies over time but is shown to increase in the early 1990s, early 2000s and again from 2009 forward This is consistent with the previous findings of a decline in the

contribution of TFP to growth from 2009 forward

Potential output and the output gap can be calculated

using this estimated production function Following

standard procedure, trend series for labor, capital and

estimated inefficiency (u) are calculated using an HP

filter Based on this, potential growth is currently around

6 percent (below the 7 percent average of the last

decade), and would remain close to that rate in coming

years, assuming inputs, TFP, and inefficiency remain

around current levels, consistent with the gradual

reform scenario in staff’s baseline projection A negative

output gap opened after the global financial crisis, and

widened to around 1½ percent of potential GDP in 2013 This output gap tracks well with recent inflation trends

1 For a discussion of stochastic frontier analysis see Subal C Kumbhakar and C A Knox Lovell, Stochastic Frontier

0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08

Capital Labor and Human Capital TFP TFP Linear (TFP)

Real GDP growth and TFP -National Accounts

(percent contribution to GDP growth)

Sources: Vietnamese authorities; and IMF staff estimates

-1.5 -0.5 0.5 1.5 2.5 3.5

-15 -5 5 15 25 35

1994 1997 2000 2003 2006 2009 2012

Headline inflation (LHS) Core inflation (LHS) Output Gap (percent of potential, RHS)

Output Gap and Inflation

(Year-on-year percent change)

Sources: Vietnamese authorities; and IMF staff estimates.

0 2 4 6 8 10 12 14 16

10 10.5 11 11.5 12 12.5 13

1970 1976 1982 1988 1994 2000 2006 2012

Inefficiency gap (u, percent) RHS Frontier (billion 2005 US$) LHS Actual (billion 2005 US$) LHS

Potential GDP Frontier vs Actual

Source: IMF staff estimates

90 percent from a peak of around 105 percent in 2011, helped partly by sales of NPLs to the Vietnam Asset Management Company (VAMC) The official NPL ratio rose to 4.2 percent and capital adequacy is reported above the 9 percent regulatory minimum, but stricter loan classification and provisioning, and adjustments to account for multiple gearing and connected lending would likely cause both to show a significantly weaker situation NPLs and sluggish credit growth resulted in weaker profitability, with the system-wide ROA and ROE in 2013 at 0.5 and 5.6 percent, respectively Prices of real estate, a significant source of banks’ loan collateral, have yet to turn around after falling by about 50 percent from their peak

9 Growth is projected to continue its gradual recovery with subdued inflation Staff’s

baseline scenario assumes the authorities will maintain an expansionary policy stance to offset

headwinds from slow banking and SOE reform implementation For 2014, real GDP growth is

projected at 5½ percent, inflation around 5¼ percent, the current account in surplus, and reserves around 2½ months of prospective goods and services imports Over the medium term, growth is

projected around 6 percent, reflecting a cyclical recovery of the domestic economy, with inflation

remaining in single digits A rebound in imports would return the current account to a deficit The

current fiscal stance would result in the accumulation of public sector debt to around 60 percent of GDP, slightly below the authorities’ legal limit of 65 percent

10 Under this scenario, domestic risks are tilted to the downside Slow progress in banking

reform raises the economy’s vulnerability to adverse shocks and heightened distress, the realization

of which could result in negative macro-financial feedback, significantly undermining growth and

adding to public-sector liabilities Delays in fiscal consolidation would reduce fiscal space that may ultimately be required for banking and SOE reforms, and could pressure interest rates, crowd out

growth-enhancing spending, erode public confidence, and ultimately undermine debt sustainability

feedback loop

Activate crisis management plan, ensure emergency liquidity while maintaining monetary control, orderly bank resolution and recapitalization, strengthen safety nets

rates; business confidence undermined

Broaden revenue base, reduce exemptions, strengthen administration, introduce a property tax, curtail non-essential spending

Surges in global financial market

volatility

exchange rate and reserves

Greater exchange rate flexibility and stand ready to raise interest rates Accelerate fiscal consolidation, and structural reforms to support confidence and FDI.

Protracted period of slower growth

in advanced and emerging

economies, growth slowdown in

Disruptions triggered by

geopolitical incidents in East Asia

inflows, lower tourism, export and import growth

Stand ready to raise interest rates, allow exchange rate flexibility Accelerate structural reforms to support confidence and investment.

Earlier-than-expected

implementation of TPP or FTAs

investment; productivity improvement

Accelerate SOE and market reforms, and adopt monetary policy framework with more exchange rate flexibility.

M

Vietnam: Risk Assessment Matrix 1/

M

1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF

staff) The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability

below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more) The RAM reflects staff views on the

Exports Imports

Share of Exports and Imports, 2013

(In percent of total Vietnam's exports/imports)

0 10 20 30 40 50 60 70 80 90 100

Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports

US EU China Korea Malaysia Japan Singapore

Food Machinery and vehicles Fuels, electricity and lubricants Raw materials Manufactured goods Chemicals Miscellaneous manuf arts All others

Composition of Total Trade

0 5 10 15 20 25 30

Whole sales and retail sales Technology and science All others

11 The economy is also vulnerable to spillovers from external shocks.In the short-term, surges in global financial market volatility, higher global interest rates, or protracted regional

geopolitical tensions could undermine confidence, and reduce international reserves absent greater exchange rate flexibility In the medium-term, a high degree of openness and reliance on FDI make the economy vulnerable to slower growth in major trading partners In particular, China is an

important trade partner, main source of imports into the electronics and garments supply chain, and source of FDI and tourism (Figure 3) Early agreement on Trans Pacific Partnership (TPP) negotiations and Free Trade Agreements (FTAs) with the European Union and Korea are upside opportunities that would secure access to main export markets and spur market-based reforms

Figure 3 Vietnam: Regional Linkages

China is an important trading partner,… …a key source of capital and manufactured goods imports, and an important food and fuel export destination

China also accounts for a moderate share of FDI

commitments,… …and a sizable share of tourism receipts

Sources: Vietnamese authorities; UN Comtrade; IMF, DOTS; and IMF staff estimates.

12 The authorities broadly concurred with the near-term macroeconomic outlook To

mitigate external risks they have reassured investors following recent geopolitical events, and

reinforced the importance of structural reforms, trade diversification, and on-shoring of supply chains through TPP and other FTAs They noted that the current account surplus, capital flows

management, and the relatively small holdings of domestic assets by nonresidents limited the impact

of global financial volatility on domestic markets On domestic risks, they emphasized work was

underway on bank and SOE restructuring, with progress in line with their plans, and they viewed the risk of systemic distress as small They considered the level of public debt as manageable, but

recognized the risks of a further increase, and were looking to tighten fiscal policy gradually going forward

POLICY DISCUSSIONS

Discussions focused on the near-term macroeconomic stance to entrench stability; measures to

underpin a growth-friendly fiscal consolidation and address rising public debt; strengthening the monetary policy framework and moving toward greater exchange rate flexibility; broadening the banking sector reform agenda; and advancing SOE reforms

A Fiscal Policy

13 As growth has slowed in recent years, an expansionary countercyclical policy has been adopted Tax and tariff reductions and exemptions have contributed to a downward trend in

revenues as a share of GDP, in contrast to

regional experience, resulting in an

expansionary revenue stance in cyclically

adjusted terms The expenditure stance has

also been stimulative For 2014, the deficit is

projected to rise to around 6½ percent of GDP

(GFS 2001), with lower revenue (reflecting a

cut in the corporate income tax rate from

25 to 22 percent, continued tariff reductions,

exemptions, and subdued growth) more than

offsetting expenditure restraint, including

capital outlays and a freeze on the size of the

civil service and wages

14 Efforts have been made to broaden the revenue base, but buoyancy has declined

Improved administration measures include reducing tax evasion and arrears, disclosing incidents of tax fraud, and streamlining VAT refund procedures while introducing thresholds Profitable SOEs have been required to pay dividends in 2013–14 Vietnam compares favorably in the region in terms

of tax revenue productivity but the base has eroded, reflecting in part exemptions and incentives At the same time, the VAT rate was halved for certain housing projects and a further corporate income tax rate reduction, to 20 percent in 2016, is planned

-6 -3 0 3 6

Revenue and Expenditure Stance

(In percent of GDP)

Sources: Vietnamese authorities and IMF staff calculations. Est. Proj.

expansionary

Revenue 1/

(In percent of GDP)

1/ ASEAN-4 includes Indonesia, Malaysia, Philippines, and Thailand.

Oil revenues CIT

VAT Trade PIT Others

1.3 2.6

Non-social current expenditure

Capital expenditure

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5

Expenditure, 2013 1/

(Change since 2011, and percent of GDP)

12.1 9.2

Foreign debt Domestic debt Total

Public and Publicly Guaranteed Debt

Figure 4 The fiscal position has deteriorated, and public debt is rising

Fiscal revenue has been in decline… …in contrast to regional trends…

…with weakness in VAT, trade, CIT, and oil revenues since

2011

Meanwhile, capital spending has been restrained since 2011…

…to limit the deterioration in the fiscal position Public debt is rising, with domestic debt accounting for most of the increase

Sources: Vietnamese authorities; IMF, WEO; and IMF staff estimates

0 40 80 120 160

China Vietnam Cambodia Lao P.D.R Sri Lanka ASEAN-4

Public Capital Stock

(In percent of GDP, 2011)

Sources: Center for International Comparisons, OECD, IMF staff.

Note: ASEAN-4 includes Indonesia, Malaysia, Philippines and Thailand.

Tax Revenue Productivity, 2013

Sources: World Economic Outlook and IMF staff calculations

Note: Revenue productivity is revenue to GDP ratio divided by tax rate Earlier data are used if 2013 data are unavailable

15 Room exists to adjust the composition of expenditure Spending on education is

commendably higher than in comparator low-income and emerging-market countries However, expenditure on public employee compensation is significantly higher as a share of GDP Capital

spending has historically been in line with other low-income countries, but a decline is budgeted this year Maintaining high-quality investment spending would improve the stock of public capital in a regional comparison

16 Public debt is projected to increase to around 55 percent of GDP in 2014, substantially higher than just a few years ago, requiring increased attention (Box 3, and debt sustainability

analysis) Maintaining the current policy trajectory would lead to higher debt even with continued expenditure restraint—including on investment, which undermines long-run growth potential—and temporary revenue measures such as SOE dividend payments The effectiveness of the current

expansionary stance is undermined by the economy’s structural constraints, it takes up fiscal space raising vulnerability to shocks, and risks crowding out lending to the private sector Moreover,

international experience indicates that public debt could rise substantially were systemic banking sector distress to materialize SOE restructuring may also ultimately require public funds

Maximum revenue productivity since 2003

Personal Income Tax

0 5 10 15 20 25

30 Latest available Maximum revenue productivity since 2003

Corporate Income Tax

0 20 40 60

80

Latest available Maximum revenue productivity since 2003

Value-added Tax

0 2 4 6 8 10

Compensation for public employees (2011)

Education (2011)

Health (2011) Interest payment (2012)

Capital expenditure (2012)

Vietnam Low-income countries Emerging Economies

Expenditure: International Comparison

(In percent of GDP)

Sources: World Economic Outlook; World Bank, World Development Indicators; IMF staff and authorities

estimates.

Box 3 Vietnam: What is an Appropriate Medium-Term Public Debt Target?

Public debt in Vietnam has increased considerably in recent

years In contrast, other low income economies have generally

reduced public debt ratios Public and publicly-guaranteed

debt almost doubled since 2000, and at around 55 percent of

GDP in 2014, is higher than average in the region and among

low-income economies

The rise has resulted from an easy fiscal stance, reflecting

primary deficits, and recently, an output gap The rise in debt

accompanied higher current expenditure over this period,

while capital spending remained broadly unchanged as a

share of GDP

While external concessional loans remain a large share of the debt portfolio, domestic debt has accounted for most of the increase Domestic bond market development has provided the government additional financing sources, but vulnerabilities are building The

maturity structure has been shortened greatly, with

maturities of less than seven years comprising 94 percent of

total annual domestic bond issuance in the 2008–13 period

As well, agencies other than the Ministry of Finance are

allowed to issue bonds with maturities exceeding one year

Cross-country experience suggests that Vietnam’s public

debt is rapidly approaching an unsafe level Three

econometric models are estimated to determine thresholds

beyond which debt distress could materialize Probit and

signal models are estimated using cross-country data and

the results are applied using data for Vietnam, while a debt

intolerance model estimates the relation between public

debt and investment ratings for Vietnam.1 To calculate a

safe debt threshold, a buffer for potential contingent

liabilities is subtracted from the estimated debt distress

thresholds—the value of the buffer is the average debt

increase that has materialized in international experiences

of systemic banking distress.2 The results suggest a safe

debt level ranging from 40 to 45 percent of GDP for

20 40 60 80 100 120 140

General Gross Government Debt:

International LIC comparison

LIC-Western Hem LIC-Asia & Pacific LIC-Africa LIC-Middle East and Central Asia

Vietnam LIC-frontier 1/

Source: IMF staff calculations.

1/ LIC- frontier market countries are a subset of low income countries (LIC) that have small financial sectors and/or have low annual turnover and liquidity, but nonetheless demonstrate a relative openness to and accessibility for foreign investors.

HND

CMR

YEM NIC

MLI COD

KHM

MMR

UGA

GHA MDA

HND CMR

YEM

NIC BGD ZMB

NPL

SDN

-6 -4 -2 0 2 4 6 8 10

Signal Approach

Debt Intolerance Framework

17 Staff recommended a fiscal consolidation that protects social spending and investment and makes space for potential restructuring costs A growth-friendly consolidation that returns

the debt ratio over the medium term closer to 45 percent of GDP, around the level that existed a few years ago, is achievable The aim would be to support robust inclusive growth and poverty reduction, and mitigate risks The adjustment would provide space for potential bank and SOE restructuring costs, higher capital spending, and maintaining critical social expenditures

18 Reversing the decline in the revenue to GDP ratio is a priority Staff recommended broadening the tax base by eliminating exemptions, reducing incentives, introducing a property tax,

and including pensions under personal income tax Forgoing the planned reduction in the corporate income tax rate would contribute around ⅓ percentage points of GDP in revenue, and making permanent the requirement for SOEs to pay dividends to the budget would also contribute

importantly Strengthening administration could return revenue productivity to past higher levels and result in significant revenue gains

19 Staff proposed expenditure reforms along three dimensions: ensuring the sustainability

of social spending and targeted measures to address inequality and growth inclusiveness;

safeguarding well-targeted capital expenditure to support growth potential; and rationalizing the public wage bill in a sustainable way by replacing the across-the-board wage and hiring freezes with deeper, efficiency-enhancing civil-service reforms

20 The authorities broadly agreed with staff’s baseline fiscal assessment They aim to

broaden the tax base and strengthen administration, but noted a property tax and personal income tax on pensions would be difficult to enact Consideration is being given to raising excises, while income tax rate reductions are needed to support growth and competitiveness, and should result in higher revenues Social spending will be protected with priority given to poverty reduction,

agriculture and rural areas; the law on public investment has been revised to enhance efficiency and prioritization; and greater use of public-private partnerships is under consideration The authorities concurred with the objective of containing the public sector wage bill, highlighting the importance of addressing redundant employees, and plan to undertake a public expenditure review with World Bank assistance

1/ Public guaranteed debt, ODA onlending and valuation change are the same as in the baseline.

Fiscal Consolidation Scenario 1/

21 The authorities are fully aware of public debt risks They expect the debt-GDP ratio to peak

around 2016 and decline afterward with a gradual consolidation, and emphasized that the

government’s ceiling of 65 percent of GDP would not be breached This would allow sufficient space for countercyclical policies They noted that downside risks could exist if adverse external shocks materialized, or if SOE performance deteriorates, but they reiterated that public funds would not be used for banking sector restructuring

B Monetary and Exchange Rate Policy

22 Maintaining a supportive monetary stance is appropriate as long as inflation pressures remain absent Evidence of an excess supply gap exists, growth is below potential, core inflation has

declined, and wage pressures are benign As well, the transmission of easier monetary conditions to credit growth appears to have been dampened in recent years (Box 4) At this juncture, easy

monetary conditions do not pose a risk to financial stability Real estate prices remain subdued and equity market price/earnings ratios are around 15 percent Indeed, supportive liquidity conditions are currently facilitating banking system adjustment If significant capital outflows were to occur, greater exchange rate flexibility should be the first line of defense, and consideration might also be given to raising domestic interest rates

23 Moving gradually toward using inflation as a nominal anchor would provide a better framework for monetary policy Currently there exist multiple targets and instruments, including

broad money, bank credit, and various interest rates A daily US$/VND exchange rate target is

announced, with a band of ±1 percent Maintaining a supportive stance and the exchange rate peg will be challenging in the near term if global interest rates rise In the medium term, the economy will increasingly face asymmetric shocks and would benefit from an independent monetary policy To start, the band for exchange rate fluctuation could be gradually widened, reforms initiated to

promote a deep and liquid foreign exchange market and establish an interest rate instrument while reducing reliance on quantitative targets, liquidity forecasting and management improved, and

monetary policy communications increasingly geared toward price stability

24 Greater exchange rate flexibility would help absorb external shocks and facilitate

reserves accumulation The real effective exchange rate has appreciated by about 2 percent

compared to a year ago However, the results of CGER-type analysis and broader trends in the

balance of payments suggest there is no convincing evidence of misalignment Notwithstanding, further strengthening international reserve adequacy would improve resilience (Box 5)

25 The SBV viewed inflation control as a top priority since early 2011 to achieve a more stable macroeconomic environment conducive for structural reforms Supportive monetary

conditions remained appropriate in the near term, given low inflation and weak demand, as well as the dampened transmission mechanism that reflected economic restructuring, financial weaknesses, and low demand for credit Despite the recent strong increase in reserves, the authorities considered further accumulation as desirable, to bring them more in line with adequacy metrics

Box 4 Vietnam: The Effects of Monetary Policy on Bank Lending

Monetary policy generally affects the supply of bank credit through two channels The first is direct and

common across banks The second may vary according to the financial position of each bank—the bank lending channel—whereby stronger banks are less reliant on central bank funding than weaker banks and therefore less responsive to changes in policy.1 This box investigates the extent to which credit supply depends

on policy rates in Vietnam, and if this relationship varies with banks’ financial characteristics

A model is estimated on a panel of balance sheet data for state-owned and other commercial banks over 2000–2013, using an Arellano-Bond GMM specification with fixed effects To isolate the bank lending channel, the model introduces an interaction term between the policy interest rate and observed financial heterogeneity across banks It controls for loan demand determinants, such as past loan growth, GDP growth, and the cyclical effects on banks’ profitability, size, liquidity, capital, and borrowers’ risk (loan loss provision); as well as

unobserved heterogeneity, e.g., business models and risk propensity Allowing for the possibility that monetary policy may affect credit decisions differently after the financial disruption in 2011, a time dummy interacting

with relevant lagged explanatory variables is included For bank i in period t, loan growth (L i,t) is specified as follows:2

Key findings: First, changes in monetary policy have an inverse direct impact on private credit growth that is

common across banks.3

Second, the bank lending channel emerges after 2011

Credit supply by the banking system as a whole reacts

less to policy rate changes compared to the earlier

period, when the impact of policy did not vary with

banks’ financial positions This channel has dampened

the transmission mechanism

Third, banks’ health is an overwhelming factor

determining credit supply A weakening of banks

lowers credit growth, ceteris paribus, while

strengthening banks’ capital and liquidity would have a

vigorous positive impact on credit growth

_

1 See Kashyap and Stein (1995) on the role of bank size in monetary policy transmission mechanism; Kishan and Opiela (2000), Van der Heuvel (2002), and Bernanke (2007) on capitalization; and Kashyap and Stein (2000) and Chatelain and others (2003) on liquidity position

2 L denotes loan growth (y/y), excluding interbank positions; MP is the SBV’s refinancing rate; NGDP is GDP growth (y/y); ROE is return on equity; LLP is loan loss provisions to asset ratio; w is a vector of ROE and LLP while z is a vector of bank size, liquidity ratio, and capital ratio, standardized across banks; and d =1 during 2012Q1–2013Q4, and 0 otherwise

3 The elasticities are in line with estimates for Germany, France, and Italy during 1999–2011 (De Santis and Surico, 2013)

-4 -2 0 2 4 6 8 10 12

Direct Bank lending channel Direct Bank lending channel Capital ratio Liquidity ratio

Not significant Significant

Elasticity of loan growth to changes in the refinancing rate, and banks' financial position over two years

At 10 percent statistical significance level.

2000-13

Box 5 Vietnam: External Sector Assessment

CGER-type analysis based on the macro-balance and external

sustainability approaches suggests the real exchange rate is

moderately undervalued, requiring a 5–8 percent real effective

appreciation to close the gap between the underlying and

estimated current account norm, ceteris paribus In contrast,

after a sharp real appreciation in 2012–13 (reflecting high

relative consumer price inflation), the equilibrium real

exchange rate approach points to substantial overvaluation,

with a real effective depreciation of about 16 percent needed

to restore equilibrium These results are well within the margin

of error, which can be large

Broader trends also suggest there is no convincing evidence

of misalignment The external balance of the FDI-intensive

export-oriented sector remains in significant surplus, with the

recent overall current account improvement largely reflecting

a correction in the domestic economy, and thus cyclical

weakness Wages remain competitive, and foreign direct

investment inflows remain robust These considerations are

tempered by the level of reserves (see below) and the risk of

the exchange rate becoming overvalued if large public

contingent liabilities are realized during bank restructuring

Capital and financial account flows have been dominated by

foreign direct investment and relatively smaller portfolio flows

into the country’s two stock markets Despite the lack of large

and internationally integrated capital markets, other financial

flows have been quite volatile, as demonstrated by the large

outflows recorded in the balance of payments in the second

quarter of 2013 and large negative errors and omissions

Although they increased recently, measured against several

metrics Vietnam’s international reserves are lower than before

the global financial crisis, and below regional comparator

countries In early-2014, reserves made up about 2½ months

of prospective imports of goods and services, well below the

8 months average of regional emerging market countries, and

below the minimum level desirable for countries with a fixed

exchange rate, according to the Fund’s reserve adequacy

metric

Staff’s overall assessment is that the external position would

benefit from further strengthening The relatively strong

current account position is the result of productivity gains in

the FDI-dominated export sector, a well diversified export

base and markets, and the weak cyclical position of the

domestic economy As domestic demand recovers in the

baseline scenario, the external position will likely deteriorate

owing to high import elasticity An accelerated pace of

structural reforms beyond staff’s baseline are needed to

improve productivity, particularly in the domestic sector, and

increase investment efficiency to bolster external

sustainability Fiscal consolidation, a more flexible exchange

rate and higher reserves would also reduce vulnerabilities

0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5

2000 2002 2004 2006 2008 2010 2012

Equilibrium RER Upper Bound Lower Bound REER

Equilibrium Real Exchange Rate

Source: IMF staff estimates.

-30 -20 -10 0 10 20

2000 2002 2004 2006 2008 2010 2012

Overall Foreign investment enterprises Domestic economy

External Current Account

(In percent of GDP)

Sources: Vietnamese authorities; and IMF staff estimates

balance Sustainability 1/

Underlying current account balance -1.9 -1.9 Current account norm -4.8 -6.3 Required change in the current account -2.9 -4.4 Implied over (+) / under (-) valuation -5.2 -7.9 Source: IMF staff estimates

1/ NFA norm of -68 percent of GDP

0 50 100 150 200 250 300

2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1

Fixed Exchange Rate Flexible Exchange Rate

"Adequate" Reserves

Reserve Adequacy Metric Dynamics

(Reserves in percent of reserve metric)

Sources: Vietnamese authorities; and IMF staff estimates

Months of Imports of G&S 1/

Percent of Exports of G&S

Percent of Broad Money

Percent of Short- Term Debt Percent

Sources: Vietnamese authorities; IMF, WEO ; and staff estimates.

1/ In months of prospective imports of G&S.

2/ Excludes Singapore for short-term debt indicator.

Regional Comparison of Reserve Indicators

26 The SBV broadly agreed with recommendations to enhance the monetary policy

framework The authorities explained that they had increasingly implemented monetary policy

through short-term interbank interest rates, and were beginning to view money and credit targets as indicative Liquidity forecasting had improved, and progress had been made in communicating the rationale for policy action to help guide market expectations They noted that a stronger banking

system and increased confidence in the currency would be needed to facilitate a smooth transition from the exchange rate to inflation as a nominal anchor over the medium term

C Banking Sector Reform

27 The implementation of several recent policy measures will help improve the functioning

of the banking sector Liquidity has improved thanks to accommodative monetary conditions and

FDI and remittance inflows Most banks have been asked to submit restructuring plans to the SBV A new risk management regulation based on Basle II is being drafted and an adoption roadmap has

been developed, which will be piloted in ten banks.2 The VAMC has begun purchasing NPLs from

commercial banks and is planning liquidation, restructuring, and outright sales to unwind them Its capital will be increased A revised bankruptcy law has been adopted and related legislation is under review to provide smoother enterprise restructuring and debt resolution The limit on banks’ single foreign owner was increased slightly under an unchanged overall foreign ownership cap of

30 percent.3 A new Monetary and Financial Stability Department was created in the SBV, and the SBV has issued an action plan for the banking sector to supplement existing strategies

28 Improved liquidity has given the banking system much needed breathing space, but a number of key problems remain Asset quality remains under pressure from weak domestic activity and recent years’ sharp decline in real estate prices, and profitability is low Full implementation of

tighter loan classification has been postponed, to 2015, allowing loan rescheduling and new lending to delinquent customers without reclassification, and some merged institutions are granted time to comply with key prudential norms Banks have five years to provision against NPLs sold to the VAMC in

exchange for bonds that are nonmarketable, pay no interest, and are not government guaranteed

Significant legal hurdles for the transfer of loan titles and collateral impede NPL resolution The

macroprudential framework requires refinement Administrative levers including sector-specific lending directives and interest rate limits remain

29 To be successful, reforms must address the root causes of the problem and be bold

Weak balance sheets, regulatory forbearance, connected lending and cross ownership (including

between banks and SOEs), weak risk management, and the presence of special interest groups will

result in credit being channeled to unprofitable and unproductive businesses and may become a

drain on public resources both in the form of foregone earnings and potential recapitalization costs International experience shows that a resumption of robust economic growth is unlikely as long as

banks remain undercapitalized and the monetary policy transmission mechanism is impaired

120

150

180

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Indonesia Jakarta Index Malaysia FTSE Index Philippines PSE Index

Thailand SET Index Vietnam HOSE Index

Stock Market Performance 1/

(Index, January 2012=100)

1/ Data as of June 16, 2014.

0 30 60 90

0 2 4 6

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

Gross foreign purchase of government bonds (right axis, in millions of USD) Vietnam, EMBIG spread

Emerging Asia, EMBIG spread

Sovereign Bond Spreads

(In percentage points)

Domestic Bond Yield Curve

(Percent per annum)

0 4 8 12 16

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Interbank overnight rate Interbank 1-week rate 3-month deposit rate

1/ Vietnam as of April 2014; Philippines as of September 2013; Thailand, Malaysia

and Indonesia as of end-2013.

Figure 5 Overall financial conditions have improved, but banks remain weak

After posting sharp gains in the first quarter, the stock

market has corrected

Sovereign spreads have narrowed by more than those in emerging Asia

The government is facing a more favorable financing

environment Bank funding costs continue to decline

…but asset quality is poor… …and banks continue to deleverage

Sources: Vietnamese authorities; Bloomberg LP; IMF, WEO; and IMF staff estimates.

70 80 90 100 110 120

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

30 Staff recommended using breathing space created by improved liquidity conditions to adopt a more comprehensive and sequenced reform agenda (Box 6) Core pillars include: a more

expeditious recognition of NPLs, supported by bank diagnostic assessments and legal and SOE reforms; restructuring and recapitalization of viable banks; and orderly exit of insolvent institutions, supported if necessary by a stronger safety net A revamped VAMC, with ability to buy and sell impaired loans at market value as is currently under consideration, could play a significant role The crisis management framework and supervision should be strengthened, and the use of administrative measures gradually eliminated

31 The authorities agreed with the thrust of staff’s recommendations, but argued for a more gradual pace More time was needed to match banks’ capacity to absorb losses generated by

stricter regulatory standards, and to support the economic recovery In their view, the root causes of banking sector weakness were clearly identified, forbearance had been tightened, banks were

required to report NPLs to the SBV under stricter norms, and financial weaknesses were not systemic The constraints imposed by the existing legal system and connected lending that complicate NPL resolution, and the decision not to use public funds for recapitalization, were well understood The authorities acknowledged the recommendation that a comprehensive reform package, including solutions to tackle the constraints of budgetary resources and legal reforms, is needed to accelerate banking reform and NPL resolution They emphasized that progress had been made in this process

D SOE Reform

32 SOE reform is progressing Restructuring plans have been developed, and efforts are

focused on amendments to the legal framework, divestment from noncore areas, and equitization

To improve the legal framework, the government has issued new regulations to enhance SOEs’ financial reporting and transparency, improve internal controls by defining different government agency responsibilities, and improve corporate governance To facilitate equitization, enterprises can now sell assets below book value with the approval of the government, and several have had IPOs

33 While improvements to the legal framework are welcome, implementation remains a challenge, in part due to capacity constraints Approved restructuring plans have been made

public, but implementation progress is uneven, particularly among some SOEs’ subsidiaries

Oversight of SOEs by government agencies is fragmented, and the focus on partial equitization risks diverting attention away from operational reforms to enhance efficiency Public disclosure of SOEs’ financial condition should be enhanced with timely publication based on international accounting practices

34 Restructuring could be enhanced by several measures A high-level steering committee to

oversee the reform agenda, facilitate coordination among ministries, and monitor implementation would expedite progress Expanding the scope of divestment beyond noncore areas would improve efficiency and level the playing field for the private sector, particularly if it were accompanied by external management expertise Capacity at various ministries could be enhanced, and restructuring costs estimated to quantify fiscal implications

Box 6 Vietnam: Bank Reform and Contingency Planning

Key pillars of a comprehensive reform include:

 Assessing banks’ recapitalization needs Prioritize systemically important banks and undertake

diagnostic assessments: (i) on the basis of audits conducted by internationally reputed firms; (ii) under strict application of prudential norms; and (iii) accounting for connected lending, multiple gearing, and loan-financed equity injections

 Revising classification criteria to guide resolution options Based on the diagnostic assessments,

modify banks’ classification as: (i) healthy; (ii) undercapitalized but viable; or (iii) insolvent and nonviable Identify systemically important institutions to determine resolution options

 Recapitalizing, restructuring and resolving Foreign strategic partnerships have provided welcome

capital and management expertise for a number of banks, and the increase in single foreign ownership limit is welcome, although unlikely to provide significant new capital Recapitalization of SOCBs immediately after the diagnostic assessments, along with elimination of forbearance and implementation of restructuring plans, would support confidence in the system and mitigate moral hazard Undercapitalized but viable credit institutions should submit time-bound plans to raise capital to the regulatory minimum Non-viable and insolvent institutions should be resolved in an orderly manner, supported by a legal framework for purchase and assumption transactions

 Strengthening the VAMC To contribute to effective NPL resolution, the VAMC will likely need more

capital, in the form of equity rather than bonds, and an enabling legal framework to facilitate the transfer of loans and collateral It should also be granted legal and operational independence and transparent governance, given incentives for rapid disposal of assets, and operate with a clearly defined sunset clause

 Developing additional options to deal with NPLs Other resolution options designed for different

types of NPLs—which pose different legal challenges—include: (i) a court-led track for large and complex economic groups; (ii) a bank-led track, facilitated through legislation establishing a “pre-packaged” plan covering negotiation and approval mechanisms; and (iii) a special administrative restructuring track for selected SOEs financed exclusively by SOCBs NPL resolution should be carried out in coordination with restructuring programs for the indebted SOEs

 Tightening supervision to ensure sound lending practices going forward Risk mitigation would

require the immediate elimination of measures allowing lending to defaulted borrowers

Regulatory forbearance should be phased out as soon as feasible, while reform towards risk-based supervision continues over the medium term

 Revamping the architecture and procedures for crisis management, including: (i) a senior policy

group (SPG) for decision making comprising the SBV Governor, Minister of Finance and relevant deputies; (ii) a technical secretariat to provide daily reports and analysis to the SPG; (iii) preparation

of templates for notifications and instructions to banks; and (iv) a communications strategy

 Strengthening financial safety nets during the reform process Extraordinary liquidity provision and

extended coverage of deposit insurance (DI) may be necessary during the reform process, but the conditions under which they are provided and the funding of the DI should be identified ex-ante and in a fiscally transparent manner

35 The authorities emphasized their efforts to develop the legal framework, and to

improve the management and supervision of SOEs They agreed that the current ownership

structure of SOEs is fragmented Equitization efforts are constrained by weak economic conditions, and budgetary resources are not available to fund SOE restructuring The authorities hoped to make significant progress by end-2015 They also explained they are currently drafting a law to make dividend payments from profitable SOEs permanent

STAFF APPRAISAL

36 Vietnam has made significant progress with macroeconomic stabilization and

important steps in banking and SOE reform Growth is recovering and inflation has been reduced

to mid-single digits, substantially lower than a few years ago The current account remains in surplus and gross international reserves have risen in recent years Banking system liquidity has improved, and steps toward bank restructuring—albeit gradual—are underway The VAMC continues to

purchase NPLs and is planning resolution SOE reform has also moved forward with restructuring plans, amendments to the legal framework and equitization

37 Nevertheless, economic growth remains below potential and important risks exist

Growth continues to be constrained by weak banks and inefficient SOEs Public debt is rising and approaching a level that reduces fiscal space for critical expenditures and potential costs of banking and SOE reforms The gradual pace of banking reform leaves the system vulnerable to adverse shocks and negative macro-financial feedback, which could undermine growth and add significantly

to public sector debt The economy is also vulnerable to spillovers from external shocks including surges in global financial volatility, slower trading partner growth and regional geopolitical tensions

38 Fiscal consolidation that creates space for critical expenditures and possible contingent liabilities would reduce risk and support growth A medium-term plan to return public debt to

around 45 percent of GDP should be implemented in a growth-friendly manner, and would provide space for potential bank and SOE restructuring costs Raising revenue would allow consolidation to take place while safeguarding social spending and well-targeted capital expenditure to support growth and inclusiveness This is achievable with a strategy to broaden the base, improve

administration, forego further corporate income tax rate reductions, and institutionalize SOE

dividend payments to the budget There is also space to rationalize public expenditure, including broader civil service reforms that raise efficiency and address the large public wage bill Reforms to increase public investment efficiency are welcome

39 The current monetary policy stance is appropriate and the monetary policy framework should gradually shift from the exchange rate to inflation as the nominal anchor With output

below estimated potential, supportive monetary conditions are appropriate as long as inflation pressures remain muted The recent increase in international reserves is welcome, and greater

exchange rate flexibility would help buffer shocks and facilitate higher reserve adequacy Preparing the groundwork for moving toward inflation as a nominal anchor will be crucial for a successful transition Initial steps could be taken to promote a deep and liquid foreign exchange market, initiate

reforms to establish an interest rate instrument, improve liquidity forecasting and management, and gear policy communications toward price stability

40 A comprehensive approach to banking sector restructuring is critical to reduce financial risks and for sustainable robust economic growth The current gradual approach charts

macro-a risky pmacro-ath forwmacro-ard Not macro-addressing wemacro-aknesses forcefully, macro-and instemacro-ad relying on de fmacro-acto

forbearance and liquidity will deprive economic growth of a key engine—new credit to profitable enterprises—and makes the system susceptible to adverse shocks and asset deterioration against which banks would not be adequately provisioned This is compounded by a high risk of contagion brought about by cross-ownership among banks, and between banks and enterprises, with the potential for adverse feedback loops

41 A more expeditious recognition of losses on NPLs, restructuring of viable banks, and

an orderly exit of insolvent institutions is recommended Prioritized diagnostic assessments of

banks under application of stricter prudential norms would focus restructuring efforts and provide estimates of recapitalization costs Recapitalization, including greater foreign participation and using public funds under strict conditions for systemically important institutions, elimination of

forbearance, and continued strengthening of supervision would improve confidence, credit flows and the monetary policy transmission mechanism, and allocation of resources Legal reforms to facilitate NPL resolution—beyond the revision to the bankruptcy law—are also needed Plans to strengthen the VAMC with equity capital and the ability to buy and sell NPLs at market value are welcome Additional options to deal with NPLs, such as bank- and court-led and administrative tracks, should also be considered Finally, a stronger crisis management framework should be pursued

42 Accelerating SOE reform will reduce risks and support growth by improving the

allocation of resources While the authorities have made progress, further efforts are needed to

accelerate implementation and improve coordination of the reform agenda, which is fragmented over different agencies and ministries It will be important that efforts go beyond partial equitization and focus on strengthening corporate governance and ensuring a level playing field

43 It is recommended that the next Article IV Consultation take place on the standard month cycle

2009 2010 2011 2012 2013 2014 2015 Output

Prices (percent change)

General government finances (in percent of GDP) 2/

Net acquisition of nonfinancial assets 12.3 10.8 8.6 9.0 7.2 6.5 6.1 Net lending (+)/borrowing(-) 3/ -6.0 -2.8 -1.1 -6.8 -5.6 -6.6 -6.1 Public and publicly guaranteed debt (end of period) 46.9 48.4 46.7 48.5 51.6 54.8 57.1 Money and credit (percent change, end of period)

Interest rates (in percent, end of period)

Nominal three-month deposit rate (households) 10.7 11.6 14.9 9.4 8.3 Nominal short-term lending rate (less than one year) 12.7 14.0 16.4 12.9 12.4 Balance of payments (in percent of GDP, unless otherwise indicated)

Current account balance (including official transfers) -6.5 -3.8 0.2 6.0 5.6 4.1 3.4

Gross international reserves (in billions of U.S dollars) 4/ 14.1 12.4 13.5 25.4 26.0 38.0 48.8

In months of prospective GNFS imports 1.9 1.4 1.4 2.3 2.0 2.6 3.1 Total external debt (end of period) 38.0 38.8 38.8 38.0 38.5 38.1 38.3 Nominal exchange rate (dong/U.S dollar, end of period) 18,479 19,498 21,035 20,825 21,105 Nominal effective exchange rate (end of period) 80.8 81.1 68.2 67.9 70.1 Real effective exchange rate (end of period) 116.0 117.4 122.5 127.5 136.1 Memorandum items:

GDP (in trillions of dong at current market prices) 1,809 2,158 2,780 3,245 3,584 4,024 4,513 GDP (in billions of U.S dollars) 101.6 112.8 134.6 155.6 170.6 187.8 204.5 Per capita GDP (in U.S dollars) 1,181 1,297 1,532 1,753 1,902 2,073 2,233

1/ The national accounts has been re-based to 2010 from 1994 by the authorities.

2/ Follows the format of the Government Finance Statistics Manual 2001

4/ Excludes government deposits.

Sources: Vietnamese authorities; and IMF staff estimates and projections.

3/ Excludes net lending of the Vietnam Development Bank.

Table 1 Vietnam: Selected Economic Indicators, 2009–15 1/

Projections

Table 2 Vietnam: Balance of Payments, 2009-15 1/

Capital and financial account balance 6.8 6.2 6.5 8.7 -0.2 4.3 3.8

Memorandum items:

Gross international reserves 3/ 14.1 12.4 13.5 25.4 26.0 38.0 48.8

In months of prospective GNFS imports 1.9 1.4 1.4 2.3 2.0 2.6 3.1 Current account balance (in percent of GDP) -6.5 -3.8 0.2 6.0 5.6 4.1 3.4 Export value (percent change) -8.9 26.5 34.2 18.2 15.4 13.3 9.7 Export value (in percent of GDP) 56.2 64.1 72.0 73.6 77.5 79.7 80.2 Import value (percent change) -14.3 19.6 25.8 8.7 16.6 16.2 10.2 Import value (in percent of GDP) 63.7 68.6 72.3 68.0 72.4 76.4 77.3

Sources: Vietnamese authorities; and IMF staff estimates and projections.

1/ Data up to 2009 reflect an old presentation; from 2010, part of errors and omissions began to be reflected in net foreign assets 2/ Incorporates a projection for negative errors and ommissions going forward

3/ Excludes government deposits; data for 2009 include the SDR allocation of SDR 267.1 million.

4/ Uses interbank exchange rate.

(In billions of U.S dollars, unless otherwise indicated)

Projection

Net acquisition of non-financial assets 223 234 238 292 259 263 273

Net incurrence of financial liabilities 125 181 112 222 278 280 291

Public and publicly guaranteed debt 46.9 48.4 46.7 48.5 51.6 54.8 57.1

1/ Government Finance Statistics 2001 presentation.

Table 3 Vietnam: General Government Budgetary Operations, 2009–15 1/

2013 2014

(In trillions of dong)

(In percent of GDP, unless otherwise indicated)

Cyclically adjusted NOPB

Projections

2009 2010 2011 2012 2013 2014 2015

Credit/deposits (total, in percent) 103.9 101.0 102.7 94.8 89.1 84.5 81.9 Credit/deposits (dong, in percent) 112.4 102.9 102.1 91.6 90.0 … … Credit/deposits (foreign currency, in percent) 76.5 93.9 105.3 113.3 83.7 … … Credit to the economy

Total (in percent of GDP) 99.1 114.7 101.8 94.8 96.8 96.6 96.6 Total (year-on-year percent change) 39.6 32.4 14.3 8.7 12.7 12.0 12.2

In dong (year-on-year percent change) 44.1 29.0 13.7 12.2 18.5 … …

In FC (year-on-year percent change) 21.7 48.4 16.8 -5.1 -14.5 … …

In FC at constant exchange rate (year on year percent change) 15.1 40.7 6.1 -5.0 -15.3 … …

To SOEs (year-on-year percent change) 2/ 32.9 -15.7 5.4 7.2 9.2 … …

To other sectors (year-on-year percent change) 2/ 42.5 52.5 16.4 9.1 13.5 … …

Dollarization

Foreign currency deposits/total deposits (in percent) 23.7 21.1 19.5 14.6 14.1 … … Foreign currency loans/total loans (in percent) 17.5 19.6 20.0 17.5 13.3 … … Banks' net foreign exchange position (millions of U.S dollars) 4/ -3,886 583 2,816 4,277 -796 … … Government deposits (in percent of GDP) 3.1 2.7 2.4 2.3 2.8 … … Nominal GDP (in trillions of dong) 1,809 2,158 2,780 3,245 3,584 4,024 4,513 Sources: SBV; and IMF staff estimates and projections.

1/ Includes the SBV and deposit-taking credit institutions.

2/ Break in series in 2010.

3/ M2 over reserve money.

4/ At interbank exchange rate; excludes SBV credit to credit institutions.

Projections

Table 4 Vietnam: Monetary Survey, 2009–15 1/

(In trillions of dong at end-period, unless otherwise indicated)